Welcome to the Chinese Yuan into the IMF SDR

Dear PGM Capital Blog readers,

Today, Saturday, October 1st 2016, will be a historic day for the Chinese Currency the “Yuan” — also known as the renminbi, which means “the people’s currency” –, because starting today, it will become one of five global reserve currencies — alongside the dollar, euro, pound and the yen — in the International Monetary Fund’s Special Drawing Rights currency basket.

INTRODUCTION:
The Special Drawing Rights, also abbreviated SDR with ISO currency code XDR, is an international reserve asset created by the IMF to supplement its member countries’ official reserves.

The value of an SDR was initially the equivalent of one US Dollar at the time, or 0.88671 grams of gold. When the gold standard changed over to a floating currency system, the SDR instead became valued as a basket of world reserve currencies.

As of March 2016, 204.1 billion SDRs (equivalent to about US$285 billion) had been created and allocated to members. SDRs can be exchanged for freely usable currencies. The value of the SDR is based on a basket of five major currencies — the U.S. dollar, the Euro, the Chinese renminbi (RMB), the Japanese yen, and pound sterling — as of  October 1, 2016.

As can be seen from below chart, the following weights based on the new formula will be used to determine the amounts of each of the five currencies in the new SDR basket that will take effect on October 1, 2016:

• U.S. dollar 41.73 percent (compared with 41.9 percent at the 2010 Review)
• Euro 30.93 percent (compared with 37.4 percent at the 2010 Review)
• Chinese renminbi 10.92 percent
• Japanese yen 8.33 percent (compared with 9.4 percent at the 2010 Review)
• Pound sterling 8.09 percent (compared with 11.3 percent at the 2010 Review)

CNY TIME LINE TO BE PART OF THE SDR:
Here below we list some key events from the year 2010.

2010:

• China’s central bank pledges to increase the Yuan’s exchange-rate flexibility.
• China announces a pilot program to let overseas financial institutions invest Yuan in the interbank bond market.

2011:

• Starts trial for the Renminbi Qualified Foreign Institutional Investors (QFII) program, allowing some overseas fund-management and securities firms to invest their Yuan onshore.

2012:

• China widens the yuan’s trading band to 1 percent from 0.5 percent in the first such move since 2007.

2013:

• China increases Qualified Foreign Institutional Investor program quotas to US$150 billion from US$80 billion and expands Renminbi QFII beyond Hong Kong to include cities such as Singapore and London.

2014:

• China expands the yuan’s trading band to 2 percent from 1 percent.
• Direct trading starts between the Yuan, the Euro and the Pound.
• A trading link between the Hong Kong and Shanghai stock exchanges begins, allowing 23.5 billion yuan (US$3.5 billion) of daily cross-border transactions.

2015:

• PBOC says it will allow foreign central banks, sovereign wealth funds to enter onshore currency market.
• The IMF’s executive board, which represents the fund’s 188 member nations, decides, on November 30, 2015, that the yuan meets the standard of being “freely usable” and will join the Special Drawing Rights basket on Oct. 1, 2016.

PGM CAPITAL ANALYSIS AND COMMENTS:
The addition of the Yuan to the SDRs brings China’s currency on to the world stage as a reserve currency. The Yuan is no longer just a Chinese affair. It has to be freely available and sufficiently solid to play its part in supporting the world monetary and financial system.

China has therefore to show that it can play an important supporting role in the global financial system.

Outside the country, Chinese membership of the SDRs will have a profound impact globally. This will not happen overnight, but is expected to be a powerful trend over the next few years.

About a third of China’s trade with other countries is already settled in yuan, making China’s currency the most important in East Asia. This proportion will grow, underpinning the Yuan’s global role as a major trade settlement currency.

China is now the largest buyer of commodities like iron ore and copper, and a major producer of some, and is also the largest energy user after the United States. Commodity and energy futures markets around the world will develop contracts denominated in yuan as well as dollars.

Due to this we believe that the four biggest Chinese banks, which according with Forbes 2016 annual ranking — of the world’s largest public companies are world’s — are in the top six will profit the most of the inclusion of the Yuan in the IMF SDR.

Due to this and also based on their P/E ratio, dividend Yield and Dividend payout ratio we have a STRONG BUY rating on them.

They are:

• Industrial and Commercial Bank of China (ICBC )  -Forbes No 1 ranked-
• China Construction Bank -Forbes No 2, ranked -
• Agricultural Bank of China -Forbes No 3, ranked -
• Bank of China - Forbes No 6, ranked-

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that markets can remain longer irrational than that you can remain solvent and that prices of securities of emerging markets might be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Eric Panneflek